GMAC, Among the Weakest, Seems in Line for a Bailout

It looks as if one more bank needs a bailout. And, four months ago, this bank was not even a bank.

The company is GMAC, the onetime finance arm of General Motors, which itself seems to be hurtling toward bankruptcy.

The results of bank stress tests disclosed Thursday showed that GMAC is in dire straits. Federal regulators determined that GMAC must raise a staggering $11.5 billion in capital, the equivalent of roughly half its current equity. G.M. is in no position to help.

It would be only the latest instance of extraordinary federal aid for GMAC, whose survival is seen as crucial to G.M. and, now, Chrysler. Both carmakers are relying on GMAC to help buyers and dealers finance their purchases.

In the heat of the credit market turmoil last fall, the Federal Reserve agreed to convert several nonbank institutions, including American Express, into bank holding companies. And, in a controversial move, it also bestowed that status on GMAC, even though the company fell short of certain requirements.

Days later, the Treasury Department injected $5 billion into GMAC and gave G.M. $1 billion to acquire additional equity in it as well.

“GMAC is integral to G.M., and without a functioning GMAC, you don’t have a functioning G.M.,” said John A. Casesa, managing partner in the Casesa Shapiro Group and a longtime industry analyst. “To the extent that the government has an enormous amount of money at risk in G.M., it’s essential to help GMAC to protect that investment.”

Last week, President Obama said that his administration would supply GMAC with money to take over the financing of Chrysler’s dealers, displacing Chrysler Financial.

GMAC must present a plan to the Treasury by June 8, outlining how it plans to raise that $11.5 billion, $9.1 billion of which must be new capital.

In a statement, the privately held firm said that it could issue new common equity or convertible preferred shares, which are debtlike securities that can be exchanged for common stock.

GMAC also said that it may exchange some of the government’s $5 billion in preferred shares.

“We support the government’s efforts to shore up the banking system and expect that the additional capital raised will further strengthen GMAC and aid in achieving our strategic objectives,” Alvaro G. de Molina, GMAC’s chief executive, said in a statement.

For nearly all of its 90-year history, GMAC served as G.M.’s financing arm, providing loans to car buyers and the automaker’s dealers.

But by the time G.M. had sold a majority stake in the business to Cerberus, GMAC’s Residential Capital arm held billions of dollars worth of subprime mortgages. Cerberus and G.M. agreed to reduce their stakes in GMAC as a condition of receiving bank holding company status.

Between the housing market’s collapse and the steep drop in auto sales, GMAC began running up losses, including a $675 million loss for the first quarter this year. The firm was forced to curtail its lending, costing it market share in its mainstay business, G.M. auto loans.

The turmoil that shook the credit markets last fall threatened to cut off GMAC’s ability to finance itself, forcing it to seek to assume the status of a bank holding company to qualify for low-cost borrowing from the Federal Reserve. As part of that effort, the firm was told to exchange 75 percent of its $38 billion in bonds, or $30 billion, into equity.

Yet GMAC extended deadline after deadline in an effort to persuade holdout bondholders, including the Pacific Investment Management Company, to tender their holdings.

Still, the Fed voted, 4 to 1, to approve its transformation into a bank.

Days later, GMAC disclosed that it had succeeded in exchanging only $21.2 billion worth of bonds, or 52 percent.

Now that the Obama administration has designated GMAC as the preferred lender for Chrysler as well, many analysts doubt that the firm will be allowed to fail.

“I haven’t thought about the implications because I don’t think it’s going to happen,” Mr. Casesa said of a potential GMAC receivership.

“Presumably, it could still be reorganized. You could create another finance company tomorrow, unlike a General Motors, which you couldn’t create tomorrow.”

Correction: May 13, 2009

An article on Friday about GMAC’s probable need for a federal bailout erroneously included one company on a list of nonbank institutions that the Federal Reserve agreed last fall to convert into bank holding companies. MetLife is not among those to be converted. (It is already a federally chartered bank holding company, having started MetLife Bank in 2001.)

Micheline Maynard and Zachery Kouwe contributed reporting.

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